The Supreme Court ruled on Tuesday that tips or service charges paid by customers to the hotel staff did not amount to "wages" and could not be taken into account for payment of premium to the Employees' State Insurance (ESI) Corporation by the industrial establishment.

The court, thus, set aside the judgment of the Karnataka High Court and the ESI court, which had maintained that the amounts were part of the wages.

In this case, Quality Inn Southern Star argued that the basic question was whether the service charge collected by the hotel management from customers and distributed among employees amounted to "wages" within the meaning of Section 2(22) of the ESI Act.

According to the hotel, service charges did not constitute wages.

On the other hand, the ESI Corporation contended that the three-star hotel compulsorily collected 10 per cent of the total bill as service charge and included it in the bills. The service charges so collected are distributed among employees every quarter.

The ESI Court and the Karnataka High Court held that the nature of the service charges shows these are not directly paid by the customers to the employees but form part of the bills that the customers are obliged to pay without any option.

The hotel had total control over the distribution of the amount and this was distinguishable from "tips". It was, in any event, covered by the expression "additional reimbursement".

The Supreme Court, however, ruled that the amounts received by employees were not in the nature of "wages", as they were not given to the employees under the terms of the contract of employment.

The appointment letters expressly stated that employees were not entitled to any other remuneration. Thus, the distribution of service charges was expressly excluded from the wages.

Reacting to the court's verdict, Dinesh Khanna, President of the Federation of Hotel and Restaurant Associations of India (FHRAI), said: "It is a step in the right direction. However, only 50 per cent of the tips or service charges collected should be constituted as wages and not the rest of it."

FHRAI is the apex body of the four regional associations representing the hospitality industry.

Added Rajiv Kaul, senior vice-president, The Leela Palaces and Resorts, "We welcome the court's decision as we believe that tips and service charges are distinct from wages and should not be legislated at all."

Barring resort hotels, most hotels have done away with the tradition of collecting service charges. The choice to pay tips - the acronym for To Insure Prompt Service - has been left to customers.

A general manager of a Mumbai-based five star hotel, who requested anonymity, said: "Internationally tips and service charges have been a practice, but not yet in India so we believe it should not be taxed and we welcome the court's decision."